Second Mortgage Loans: Recognizing Your Options

A second mortgage loan is usually referred to as a home equity loan or personal credit

line that will provide a homeowner with a lot of cash for any reason. These loans typically have lower rates and offer additional tax benefits for the homeowner. At the same time, this lending makes it necessary that the property itself be pledged as security for the debt. However, your house is put at risk if the borrower is late or cannot make the monthly installments. Some second mortgage loans can allow for a final (balloon payment) which lowers the monthly payment amounts.

If the borrower sells the home, they must first pay off the first mortgage, then payoff the second. A second mortgage loan typically is reserved for homeowners who desire a set rate of interest, need a lump sum payment, and desire to make regular amortized payments monthly. Some second mortgage loans may extend for as long as 15-20 years, other may be shorter term in nature. Discussing the purpose of this lending with a counselor will determine which type of lending is best and how long repayment should be.

Benefits of a Second Mortgage

The homeowner has several choices when he owns a house in certain states. It is crucial that the homeowner check with their individual states to see who allows such mortgages. Most homeowners will place yet another lien on the property for many reasons to include:

* Remodeling

* Consolidation of debts

* College Education

* Cash

The rates on a second mortgage are cheaper than a credit card advance and thus more advantageous for the borrower. If there is equity in the property 10% or more, many banks will offer a second loan on the property that is subordinate to the first mortgage. This type of loan is an advantage for the homeowner who needs a lot of money that is not available on their credit cards.

Most lenders will charge a variety of fees for originating the equity loan. Aspects of these fees are called "points". One point is equal to one percent of the amount borrowed. For example; a homeowner taking out $50,000 would pay a $500 point fee. The number of points a lender or mortgage company charges will vary. It may be beneficial for a homeowner to shop around before applying. Second mortgage home loan fees can differ substantially between lender, as well as the interest rates offered.

Many states have regulations that limit the amount a lender can charge a homeowner for this type of lending. It is advised that a borrower check with their state's consumer protection office or banking commissioner to discover the limit. Interest rates for second mortgage loans are determined by the borrower's credit score and the amount of equity in the property. One example is; if a borrower has a high credit score and has $50,000 in equity in their house, but requests a second mortgage loan of only $25,000, they will automatically get a good interest rate. It is advised that homeowners know their credit bureau scores before shopping around for rates.

by: Adam Morris

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